REAL ESTATE AND BUSINESS LAW ALERT
A Primer on New Business Disclosure Laws: The Corporate Transparency Act
and New York LLC Transparency Act and how they affect 1031 Exchanges
Effective January 1, 2024, the Corporate Transparency Act (CTA) will require many business entities, already existing, and newly formed to file and report certain information with the Financial Crimes Enforcement Network (FinCEN).
What is the Corporate Transparency Act?
The Corporate Transparency Act (CTA)1, which went into effect January 1, 2024, requires many small companies, including corporations and limited liability companies, unless specifically exempt, to report personal information regarding its “beneficial owners” and other key management personnel (BOI) to the Financial Crimes Enforcement Network (FinCEN) of the United States Treasury Department. For more information, see the FinCEN “Small Entity Compliance Guide”, published December 2023. The CTA is part of the Anti-Money Laundering Act of 2020, a widespread government initiative to crack down on money laundering and illegal transactions. While the breadth of the CTA is broad, this update is focused on aspects related to the reporting requirements.
Who Must Report?
Most small businesses including real estate investment companies who do not meet one of the 23 listed exemptions, must report information on their beneficial owners. This includes new companies going forward and applies retroactively to existing companies. FinCEN defines them collectively as “Reporting Companies.” Examples of companies exempt from reporting include but are not limited to publicly traded companies meeting specified requirements; government entities; security reporting issuers; banks; broker/dealers in securities; and insurance companies.
Overview of the Process
Starting on January 1, 2024, BOI reports must be filed electronically using FinCEN’s secure filing system. FinCEN will store BOI reports in a centralized database and only share this information with authorized users for purposes specified by law. The filing system was supposed to provide the ability to easily link parent companies to subsidiaries and individuals to companies. Attempting to navigate the filing system and comply with the mandatory reporting requirements has led to confusion for many small and multi-tiered businesses and the professionals who support them.
What information do I need to report to FinCEN?
Reporting Company Information and Applicant Information – the FinCEN Report System asks for basic information on the company including the relevant tax identification number. It also asks for information about the Company Applicant, the individuals responsible for legally forming and organizing the company, and the person who is filing the FinCEN Report.
“Beneficial Ownership Information” (BOI)
“Beneficial Owners” are defined as (a) any individuals who, directly or indirectly, own or control 25% or more of the equity interests in the company, or (b) who directly or indirectly exercises substantial control over the entity. An individual might be a beneficial owner through substantial control, ownership interests, or both. A reporting company can have multiple beneficial owners. A key term, “substantial control” is defined in FinCEN guidance to generally include all Senior Officers (President, CEO, CFO, COO, General Counsel) or any officer performing functions of a senior officer, i.e. a Manager, regardless of their title. The “substantial control” requirement is intended to capture information regarding all responsible parties and flows up an organization chart from subsidiary entities to the controlling parent entities. The FinCEN system requires driver’s license or other government ID information for the Beneficial Owners or Control Persons.
FinCEN Identifiers
For both privacy and for efficiency purposes, individuals who frequently form entities for their clients, like attorneys, accountants, and business service companies, can obtain a FinCEN Identification Number. For reporting companies owned by a parent entity, or by a series of intermediate entities, FinCEN is primarily concerned with the identity of the individuals who are the ultimate beneficial owners of the reporting company, i.e. the individuals controlling the parent. Currently, the FinCEN website does not provide a mechanism for intermediate or parent companies to use their EIN or a FinCEN identifier as part of the BOI for a reporting company. FinCEN is trying to balance the online reporting process to provide for intermediate entities to report a FinCEN identifier, without obscuring the identities of the ultimate beneficial owners and control persons of the reporting company.2 Currently, it appears that a tax identification number (EIN, TIN, SSN) is necessary for the entity to make use of the FinCEN Report System or to obtain a FinCEN identifier.3
On July 24, 2024, after this article was initially published, FinCEN clarified reporting for disregarded entities. Including those which do not have an EIN. Here is a link to this comprehensive guidance along with a relevant excerpt:
- “If the disregarded entity is a single-member limited liability company (LLC) or otherwise has only one owner that is an individual with an SSN or ITIN, the disregarded entity may report that individual’s SSN or ITIN as its TIN.
- If the disregarded entity is owned by a U.S. entity that has an EIN, the disregarded entity may report that other entity’s EIN as its TIN.
- If the disregarded entity is owned by another disregarded entity or a chain of disregarded entities, the disregarded entity may report the TIN of the first owner up the chain of disregarded entities that has a TIN as its TIN.”
When do I need to file a report?
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- Reports will be accepted by FinCEN after January 1, 2024.
- Reporting companies created or registered to do business before January 1, 2024, will have additional time — until January 1, 2025 — to file their initial BOI reports.
- Reporting companies created or registered on or after January 1, 2024, and before January 1, 2025, have 90 calendar days after receiving actual or public notice that their company’s creation or registration is effective to file their initial BOI reports. Specifically, this 90-calendar day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.
- Reporting companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their initial BOI reports.
Where can I find additional information about BOI reporting?
- Additional information about the Reporting Rule and guidance materials are available at www.fincen.gov/boi.
- FinCEN has issued and will continue to issue frequently asked questions to address specific questions on the topic. They can be found here: www.fincen.gov/boi-faqs.
- In addition, if you have any questions regarding BOI reporting obligations, you should contact FinCEN at www.fincen.gov/contact
Pending Challenges to the Constitutionality of the CTA
In March, a federal district court in Alabama issued a decision striking down the CTA as unconstitutional.4 The decision likely only applies to the plaintiffs in the case, a handful of small business associations. FinCEN responded by issuing a Notice stating that they are challenging the holding and expect compliance from all reporting companies who are not involved in the litigation. Similar challenges were filed in district courts in Maine and Michigan 5.
Despite the legal challenges, the CTA is still effective and in force. Taxpayers should comply with its requirements. Willful failure to comply with disclosure reporting could result in civil and criminal penalties, including fines of up to $10,000, and imprisonment for up to two years.
Impact on 1031 Parking Exchanges
This new obligation to report is especially crucial for those participating in reverse or improvement exchanges. These exchange strategies generally rely on the accommodator holding indicia of ownership of the 1031 exchange replacement property indirectly through a sub entity titleholder LLC. For FinCEN purposes, the beneficial owner of the titleholder LLC in a Reverse or Improvement Exchange should be the Taxpayer/Exchanger. For entities transacting exchanges, this likely includes control persons, including any senior officer regardless of ownership. Intermediaries, nominees, or custodians facilitating 1031 exchanges appear to be exempt from reporting beneficial ownership per 31 CFR 1010.380(d)(3). FinCEN confirmed in its disregarded entity guidance that a disregarded LLC need not obtain an EIN or TIN to report BOI and can report its owner’s tax identification number. Therefore, to meet compliance deadlines, we recommend that the taxpayer or their control persons report ownership of a titleholder LLC using their individual tax identification numbers or SSNs, or parent entity EIN, and later amend their reports as needed.
Other Business Entity Disclosure Laws to Watch New York – Governor Kathy Hochul enacted the New York LLC Transparency Act (NYLTA) on December 23, 2023. It requires all New York limited liability companies established after the reporting date must disclose their beneficial ownership. The law had an original reporting date of January 1, 2025, for all entities, but it was subsequently amended so that the earliest reporting date will be January 1, 2026, for entities formed from that date forward, and Jan 1, 2027 for entities that existed prior to that date.
The NYLTA is specifically applicable to limited liability companies. The disclosure of beneficial ownership is expected to be made concurrently with the formation filing, and it is presumed to be included in the Articles of Organization for each entity created after the effective reporting date. Information reported to the NY DOS will likely not be made readily available to the public.
Similar legislation is pending in California (CA SB 738) and in Maryland (MD SB 0954).
Is FinCEN Expanding GTOs Nationwide?
Recently, FinCEN issued proposed regulations aimed at broadening the reach of existing Geographic Targeting Orders (GTOs). These orders mandate real estate professionals and closing agents involved in non-financed residential real estate transactions to report Beneficial Ownership Information (BOI) for purchasing entities. As it stands, these GTOs are only applicable to select counties and major metropolitan areas across several U.S. states.
The Federation of Exchange Accommodators, a trade association representing qualified intermediaries, has submitted a comment in response to this proposal. They have requested that the new reporting legislation includes an exemption akin to the Qualified Intermediary (QI) exemption found in the BOI Regulations. Legal 1031 helped identify relevant issues and participated in the FEA comment process. We are awaiting FinCEN’s consideration of the FEA comment and other comments from the accounting and business community.
Please note that Legal 1031 Exchange Services, LLC is not an affiliate of the IRS or the U.S. Government. All information contained herein is being reiterated from the Financial Crimes Enforcement Network website.
1 See 31 U.S.C. 5336 and the corresponding Regulations (31 CFR 1010.380 “Reports of Beneficial Ownership”).
2 A FinCEN Release on the final rule re identifiers can be found here https://www.fincen.gov/news/news-releases/fincen-finalizes-rule-use-fincen-identifiers-beneficial-ownership-information
3 According to the IRS, single-member LLCs that do not have employees and are disregarded for tax purposes are not obligated to apply for an EIN. However, it’s worth noting that certain state agencies or lenders may require these entities to obtain an EIN.
4 See National Small Business Association, et al. v. Yellen,133 A.F.T.R.2d 2024-885.
5 In Maine – Boyle v. Yellen, Case No. 2:24 – cv- 00081; In Michigan – Small Business Association of Michigan et al. v. Yellen, Case No. 1:24-cv-00314.
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